如新 (NUS) 2004 Q1 法說會逐字稿

Good morning. My name is Thea and I will be the conference operator. At this time, I would like to welcome everyone to the first quarter earnings conference call. [OPERATOR INSTRUCTIONS] Thank you. Scott Pawn (ph), you may begin, sir.

Thank you. Good morning. We appreciate all those joining us today on this conference call and listening over the Internet. I'm Scott Pawn, Manager of Investor Relations, working with Charlie Allen, and I'm here with Truman Hunt, president and chief financial officer and Ritch Wood, Chief Financial Officer.

Following management's discussion of the company's operations, the call will be open for questions. As a reminder, during this call, comments maybe made which will include some forward-looking statements. These statements involve risks and uncertainties, and as you know, actual results may differ materially from those discussed or anticipated. We encourage you to refer to our 2003 annual report filed on Form 10-K and today's earnings release for a complete discussion of risks associated with these forward-looking statements.

I will now turn the time over to Truman Hunt.

Good morning, everyone. Thanks for joining us today. Ritch and I are actually making this call from New York City. This morning or later today, we'll be presenting at the Sidoti Emerging Growth Investor Forum. We hope to see some of you there, our presentation begins at 2:40 PM this afternoon at the Grand Hyatt.

We're pleased to have announced this morning better than expected first quarter revenue and earnings. In fact, we had a record first quarter with revenue of 264 million, representing a healthy 20% growth rate. Earnings per share were 20 cents, an increase of 25% for the quarter and two cents higher than consensus estimates, while we are benefiting from the favorable comparison and enjoy the benefit of currency movement year-over-year, our revenue results are nevertheless at record level for the first quarter.

This is a result of positive trends in each of our key geographies. In Mainland China, we continued to generate strong growth. The market posted revenue of $23 million for the quarter, which represented a sequential 27% improvement over the fourth quarter. This is higher than we anticipated, particularly in light of the Chinese New Year, which we celebrated during the quarter, and which we felt really slowed us down in the first quarter of last year, just after we commenced operations in China.

China has obviously become a very important market for us, and we continue to believe that it could become a $300-500 million market over the next several years. As we've explained in the past, China regulators continued their work to develop regulations to govern the direct selling industry. We expect those regulations to be published before the end of the year, and we remain optimistic that the regulations will enable us to operate on a level plain field, with our large competitors in China, who are already direct selling.

A great deal of our management efforts in China is focused on training our now significant sales force. We continue to grow at substantial sales representative and prefer customer base in China. We now have over 4,300 sales representatives in our employed, and our preferred customer base is growing at a very rapid rate. In fact in the month of March alone, we added over 1,400 preferred customers in China everyday, which is just an incredible number.

We also continue to spend a lot of energy on building government relations. In fact, this evening in Belgium, which was just a few hours ago, former President Bush, who as you know was once the US Ambassador of China, appeared on our behalf and hosted a reception of high-level government officials for us, that went extremely well. So through efforts like this, we believe we've established ourselves as a direct selling industry leader worthy of treatment equal to what's been afforded to our large competitors.

In Japan, we posted 1% local currency revenue growth. This is a good showing when one considers a couple of issues we faced this quarter. As you know, Japan suspended beef imports from the United States as a result of the Mad Cow discovery in December. They also suspended the importation of bovine-based gelatin capsules in nutritional supplement. And when you consider the size of our business in Japan, this news understandably rated some concerns. However, our Pharmanex in Japan management team did an excellent job navigating this issue, especially with respect to supply chain management and telecommunication.

By mid-February, during the quarter, we had transitioned from capsules and caplets and had a new form of LifePak in distribution in Japan. We also transitioned other Pharmanex products in Japan to porcine based capsules; and as a result, we were able to limit stock-out situation to less significant Pharmanex products; and the team in Japan was able to effectively communicate the changes to our sales force and to our consumer base minimizing any potential concerns among those audiences.

But today, we're pleased and can confidently say that the BSE issues are behind us. As you know, we also held our international distributor convention in February in the US, which took a lot of Japan's distributors out of their home markets in February. This group spent over $3 million on products purchased at our US convention. That's $3 million that is not attributed to Japan in the Q1 numbers. So all things considered, we saw that Japan had a healthy quarter.

During the first quarter, we also performed well in the United States with a revenue of $35 million, an increase of 16% over the first quarter of last year. This includes $6.2 million of sales through international distributors at the US convention in February. However, it's also important to note that revenue in the first quarter of 2003 included about $5 million, the Big Planet services that we discontinued in third quarter of 2003.

So excluding these two factors, our US business grew about 15% during the first quarter of '04. And our nutrition business in the US grew 40% year over year with LifePak sales, which as you know is our flagship Pharmanex product, growing a remarkable 119% due to the impact of the Pharmanex BioPhotonic Scanner and incentives that are tied to the sale of LifePak.

During the first quarter, new distributor sign ups in the United States were up more than 50% over the prior year and up more than 20% sequentially over Q4. We have more distributors in the qualification process who gained executive level distributor today in the United States than we've had at any point in the last six years. Overall, our executive distributor count in the United States is up 14%.

On a global basis, much of our growth is coming from the positive and significant benefits of a growing and loyal customer base. In the United States, we found that automatic shipment subscribers remain our customers much longer on the average than non-subscribers do. So, our automatic shipment subscriber base -- as our automatic shipment subscriber base grows, the associated increase in retention rate has a very positive impact on the business.

Globally, in the month of March, we shipped 259,000 automatic subscription orders, which was an increase of 55% over the last year. So, we're very pleased with this trend as well. Just a quick word about a couple of other markets. In particular, Hong Kong reached a record sales level for the quarter up 38%, which was an impressive growth rate for a market that we opened now over 13 years ago. South Korea, which is also, which is an eight year old market for us, continues to rebound with revenue and local currency up 15%, a trend that we expect to continue throughout the year.

We also continue to focus attention on our emerging markets and are looking for debt, as you know our business model to be more successful in some of these economies. Thailand has been an interesting case study for us. It continues to be a star market with a 39% increase in revenues for the t quarter. Over the past few years, Thailand now grown and become a meaningful piece of our business. In three years there, our revenue has tripled to about $6.8 million in the first quarter of '04. And we now represent about 5% of Thailand direct selling market.

In Latin America, we've recently introduced the new business model with some modified compensation plan in an effort to make headway in Latin American markets where we've not generated the results we desire. During the quarter, combined revenue in Brazil, Mexico and Guatemala was up 19%. And we're encouraged with these results that were obviously still very early, in very early stages of modifying our business model there.

As I mentioned earlier, this quarter we held our global distributor convention to kick off our 20 years anniversary celebrations. We had over 10,000 distributors from around the world joining us in Salt Lake City. These conventions, which as you know we hold every 18 months, are our best platform to introduce major product innovations.

The Nu Skin product introductions included a new and improved Galvanic Spa System, improve -- significant improvements to that device which is a multipurpose system that brings advanced spa treatments into the home. And our top selling convention product was the Pharmanex TRA System, which is innovative and stimulatory systems for weight management, which is a category we have yet to penetrate in a meaningful way. So, we were very pleased with those results.

We're confident - in fact very confident that we have the resources in place to continue to innovate and differentiate in each of our key product categories. And before I offer some thoughts on the balance of 2004 let me turn this line over to Ritch to provide some details on the financials

Thank you, Truman. And good morning everyone. Let me quickly provide the local currency sales figures from our major geographies. First quarter revenue in Japan was 14.6 billion yen versus 14.5 billion yen in the first quarter of 2003. Quarterly revenue in South Korea was 18.5 billion won versus 16 billion won in '03.

Greater China, revenue from Taiwan during the quarter was 569 million NT dollar versus 609 million NT dollars last year, while Hong Kong reached a record 60 million Hong Kong dollars versus $43 million Hong Kong dollars in the prior a year.

In China, revenue was 109, 189 million renminbi during this quarter versus 32 million renminbi in the prior year quarter, which you'll recall was our first quarter of extended operations in China.

In South Asia, the combined US dollar revenue from Malaysia and Singapore was $8.9 million versus 9.6 million in the first quarter of 2003. Thailand also posted record first quarter revenue of 265 million aht compared to 191 million baht last year

Our US market generated 35.1 million in revenue during the first quarter compared to 30.4 million in 2003 which included $5 million of revenue from Big Planet products and services that we no longer offer.

Our first quarter 2004 revenue included 5.8 million of revenue from product sales to international distributors doing our convention in February. First quarter revenue in Europe was $8.5 million compared to 7.6 million in the first quarter of 2003.

As a result of the company's business model in China, which offers preferred customer status to retail customers in that market, as well as an increasing emphasis on preferred customer incentives for non-distributor purchasers in other markets, we have changed the way we determine and we forecasted distributors. We began including, as you know, our China preferred customers in our active distributor count last year.

With the number of preferred customers growing now in the US and other markets and because of the importance these customers are to our revenue base, we are now including preferred customers from all markets. These are customers who purchase product directly from the company, and we've included this number during the quarter in our active distributor count beginning in the first quarter of 2004. And prior year numbers also include these preferred customers for more accurate comparative purposes.

Active distributors and preferred customers increased 23% to 732,000 at March 31st 2004 compared to 597,000 in the prior year. We're encouraged with this growth and believe that our focus on increasing retention will positively impact our overall business.

First quarter gross margin improved 230 basis points compared to prior year results, up to 83.4%. This improvement is due primarily to the discontinued low margin products and services from Big Planet, higher gross margins in Mainland China resulting from in-house manufacturing, and favorable foreign currency exchange rates.

Assuming consistency in foreign currency rates, we anticipate gross margins will improve slightly in the coming quarter and in the year to the 83.5% to 84% range for the year.

Selling expenses as a percent of revenue were up to 42.7%. This is an increase of 260 basis points compared to the prior year. This increase is due to higher costs associated with employed sales representatives in China, where we have to pay benefits and also unemployment costs associated with employed sales reps there as well as the elimination of Big Planet revenue in the third quarter of 2003. You'll recall that that revenue was really very low commission to non-commission revenue. We expect selling expenses to remain in the 42.5% to 43% range for the remainder of 2004.

General and Administrative expenses as a percent of revenue improved 30 basis points over prior year results to 31.7%. This is despite approximately six million of expenses associated with the distributor convention in February versus expenses of approximately $4 million related to a Japan convention in the first quarter of 2003. The improvement in General and Administrative expenses reflects our commitment to gaining operational efficiencies from higher revenue and by controlling overhead expenses.

First quarter operating margin therefore was 9%, essentially even with prior year results. This keeps on track to post 12% operating margin for the year, which is in our stated goal. We remind you that we will host a Japan convention during the fourth quarter of 2004, and this will add approximately $4 million to our G&A expenses in that quarter.

During the first quarter, interest expense was $1.5 million. We paid dividends of 5.8 million and invested $5.9 million in capital improvement. We generated cash flow from operations of $17.4 million during the first quarter, which is a significant improvement over the same period in 2003.

We continued to model our 2004 Japan revenue with an average yen rate of approximately 110 for the year. In local currency, we expect Japan to post revenue mostly level with prior year results in the second and third quarters, and expect to post modest year-over-year growth in the fourth quarter.

With strong first quarter results in China, we've raised our 2004 guidance there to $100 to $110 million, that's up from the 80 million that we had guided to you previously. And we continue to project 20% revenue growth in our combined Pharmanex and Nu Skin business in the US for 2004.

In summary, we increased our 2004 overall guidance to 1.1 billion to $1.12 billion of revenue. We expect operating margins again to be in the 12% range for the year and earnings per share of approximately $1.10 to $1.14, again that's $1.10 to $1.14, which is up from our previous guidance of $1.4 to $1.8. We expect second quarter revenues to be approximately 270 to 275 million and earnings per share to increase 30 to 40%, which would put at 26 to 28 cents for the second quarter. With that, let me turn the time back to Truman.

OK. Thanks, Ritch. The keys to converting a record first quarter into a record year are pretty straightforward. We'll continue to concentrate our efforts on our three key geographies, Japan, United States and China. As we've indicated over the last several months, we have not anticipated a huge level of growth in Japan in 2004 and believe, that we will have a very successful year overall if we can just hold Japan even with last years result. And hopefully as Ritch indicated, start to gross sales volume slightly in Q4.

We intend to build momentum in Japan by expanding on our large consumer base there, and by preparing for the fourth quarter launch of the Pharmanex BioPhotonic Scanner, which we think can have a similar results to what we're seeing in the United States and help to retain growth in that market. We're also preparing for a Japanese convention during the fourth quarter, where the Scanner will be launched and where we'll introduce new personal care nutritional products into that market.

Second, we need to grow our US business by 20%. We'll continue to drive retention by focusing our efforts on increasing our monthly product subscriber base and will continue to build our distributed leadership by attracting new entrepreneurs to our business with the compelling Pharmanex story. Third, we need to continue to increase China revenues sequentially throughout 2004 and ensure solid infrastructure for growth and expansion.

We plan to open one more city in the second quarter and then four more cities during the balance of the year, which will bring our total number of cities open to 28 by the end of 2004. However, our new objective in China and our highest priority is to train our growing sales force which will enable us to build a solid foundation for what we believe will be very significant market for us down the road.

As we previously indicated, we look to introduce Pharmanex into China in 2005. And with favorable regulatory developments and further geographic expansion, we believe that China will enjoy continued growth for foreseeable in future.

So by executing effectively on our key geographies, we're confident that we can build our record first quarter to make 2004 a record year for Nu Skin Enterprises. OK, with that, we'll open the call for a few questions.

[OPERATOR INSTRUCTIONS] Your first question is from Kathleen Reed of Stanford Financial.

Good morning. Just a couple of quick questions. First, could you just break up the components of gross margin expansion? How much the yen benefited you? Of the 200 plus gross margin how much was the China facility?

Sure. Hi Kathy, this is Ritch.

Hi, Ritch.

We had about a 120 basis point improvement because of the Big Planet, you know.

OK.

Changes that we've made. 80 basis of improvement -- 80 basis points improvement in China.

OK.

And about 30 basis points improvement from exchange rate. It's actually a little bit higher than that for exchange rate, but then we had an offset due to some BSE issue, which ended up costing us about 30 additional basis point.

OK. Great. And second of all the executive level numbers into the -- in every region except one noticeable one is just Japan and they're still down on the year over year basis. They do seem like they're down less than they were in the fourth quarter of '03? Do you have any just expectations when we should see the executive numbers go up in Japan and just with some other initiatives you have to institute that?

Yeah. I think, as you know Kathy the health of our business is really demonstrated also by our active distributor growth, which we're encouraged with. You may recall that the prior year executive number declined a little bit from Q1 to Q2. We don't actually expect this. We expect some small improvement from here. We're seeing just a fundamental development of the business there, better efforts of retaining customers.

And as we have indicated, the thing that we think is going to drive growth in our executive numbers by the end of the year is the introduction of the scanner, which as you know, has driven good executive growth here in the US. And we have determined just in the last couple of weeks to proceed with the scanner launch there in the fourth quarter. So, hopefully, we'll even start to see some good buzz from that announcement in the upcoming couple of quarters.

So, you think Japan executive levels could turn positive on a year-over-year basis in the fourth quarter?

Yeah. I think you'll even seen them trend up a little bit in the second quarter.

OK. And then just finally, just if you could touch upon the process of your -- where you stand with your SEC reviews, if there is any new update. I think you put in another response, which is if you have any, you know, new information from that and the timing when we can expect that to be resolved?

Yeah. Good question. We filed our responses, you know, with the SEC approximately 10 days ago. This was our response relating to intangible assets and the youthful lives of those intangible assets. We disclosed that in our 10-K, that information. So, we would anticipate, I think, hearing that from the SEC within the next week or two. And hopefully, you know, resolving any outstanding issues from -- within the next month. So, I think we're hopefully on the tail end of this process.

Next month. OK. Great. Thanks very much.

Thank you.

The next question is from Mimi Sokolowski of Sidoti & Company.

Hi. And pretty much just one quick question. Pharmanex is pretty successful in the US that has something to do with demographic trends here, the emphasis on fitness and the fact that a 65% of the adult population is overweight and I think that helps. Are there are any similar trends that you see in Japan and China that would give you confidence in the introduction of the scanner and the introduction of Pharmanex for China?

Mimi, when we introduced nutrition products in Japan in the mid 90s, they actually were really quite pleased with to response that we got. A lot of people didn't think that we would benefit much in the society where diets typically better than what we Americans are consuming. But they are very health conscious and you know, that the Japanese diet overall, as is the case throughout most of Asia, is westernizing, and unfortunately becoming worst than it's been historically.

So, we're very optimistic about the nutrition category outside the US. You're right, demographic trends weigh very much in our favor with Baby Boomers who continue to approach retirement age, with modern medicine keeping us alive much longer on the average, but not necessarily keeping us much healthier. And with the costs of healthcare and medicine going up dramatically, prescription drug benefits extremely expensive.

All those trends play very much in favor of the nutrition category and while we don't see the age, where twice of the same degree we do in United States and another countries. We're very optimistic about the nutrition category outside the US.

How big of a business, excuse me, do you think Pharmanex can be in China in its first year? If you can take a stab at that?

You know we haven't given any 2005 guidance yet. I think probably at the end of the second, we'll start talking about 2005 and start to give a little bit of a preview on what we expect there in 2005.

OK. Fair enough. Thank you very much.

Thank you.

The next question is from Chris Ferrara of Merrill Lynch.

Hi, guys. Can you talk a littler bit about profitability in China at this point?

Sure. Hi Chris.

How are you?

Good. Thanks. In China, we're very encouraged with their profitability although, it doesn't follow the exact model, we see in other markets. Our gross margins come in about 500 basis points, right now higher than the gross margins throughout a lot of our other markets. At the same time, our distributor incentive, you know, our sales employee expenses are quite a bit higher coming in somewhere in the 48% range right now.

So those two benefits and the increased cost, primarily associated with the unemployment payment and benefit payments for sales employees, kind of, offset each other. In the quarter, our profitability was approximately 15% on a local basis. So, its additive really to the rest of the business and that will continue to improve, I think, a little bit as we go forward and continue to leverage the infrastructure that we have in place there.

How was that...

And for your question, really overall good or slightly better already today in the rest of our businesses.

Yeah. That's what I was looking for all. How will that change or how could it change potentially with deregulation?

The biggest issue is if we don't have to take a benefit and the unemployment costs associated with our sales reps. So, depending on how the regulations treat the requirement for employing sales -- your sales force that could be a nice benefit there.

And -- obviously China is way ahead of what you guys had originally said, what -- is there anything that is significantly different or is that just more a function of how conservative you've been with what you're projections have been thus far?

Well, Chris this is Truman. As I indicated, we really thought the Chinese New Year will have a little bit more of an impact than it did in Q1. We actually are being very cautious about our growth in China because we don't want to face an environment where perhaps our growth is a little bit over heed at a moment in time, when the regulators are considering these new regulations, and how they want to regulate the industry.

So, we're taking steps to actually slow our business down a little bit, make sure there are people received the training, make sure that these folks know what they're doing -- and that's part of the reason why we're being somewhat conscious about China even for the remainder of the years, than we - we're just really anxious to give the direct in place, train the sales force and build the foundation for the future, more so than just maximizing top-line growth.

So you're reining in potential sales in China just to avoid over leading? How are you doing that?

Well, in some of our cities, we've actually chosen to suspend the hiring of new sales reps for example, and we're working with local regulators in order to make sure that they are comfortale with our business growth and we've done this in a couple of cities and we believe that it's a prudent thing to do, as we continue work with the regulators on the new regs.

Right. Thank you very much.

The next question is from Doug Lane of Avondale Partners.

Yes. Good morning, everybody. Could we talk about the -- scanners a little bit? How many -- just try to get a feel for, how many are placed in the US now, where you obviously are getting critical mass obviously moving the needle pretty heavily now for the last couple of quarter on the nutrition business?

And then you had mentioned some distribution of the scanners overseas outside of Japan and if you give us update there and when you think those other markets will begin to shows some benefit from that selling to will be in those markets?

And then lastly, can you give us feeling for the timetable to the fourth quarter launch in Japan? Have you began ramping up production for the Japanese markets? How many or you going to initially introduce in Japan in the fourth quarter of this year and then how many do you ultimately see being in Japan by the end of 2005?

You know that's lot of questions. Let me fix through them here -- In the US right now we have about a 1,000 units out in the field and continue to add about 100 to 150 a month. In overseas markets, we only have a few units primarily in Southeast Asia. We have none in Japan, we have a few in Taiwan, Singapore, Malaysia, Hong Kong. In those units, actually that we're basically running in our walk-in centers, they're already having an impact.

I think some of the trend that you see in our growing product subscriber base stems from just a presence of even a few units in those markets. We are ramping up production. We - our US manufacturing capacity is only about 200 a month, in a facility that we're using here, so we building out a plant in China, where we'll be able to manufacture between 150 and 200 units a week. Hopefully, by midsummer, in the July/August timeframe.

We haven't and we'll be in a little bit cautious about -- what we're saying with respect to our rollout in Japan in Q4, because we're really still in the planning stages. It's not going to be a question of manufacturing constraint at that moment, we'll have good manufacturing capacity, just going to be a question of how we choose to roll the units out in that market.

The scanner presentation will be a little bit different in Japan that it is in US, the regulatory attitude there is little bit different than what it is in the US. So, the positioning will be modified a little bit, mostly for the better, however, we feel. But we -- really don't have a number to tell you today Doug about how -- scanner distribution will look in Q4? Right.

Can you -

I would say that --

Are you now ramping up production in the US for Japan? You've actually already started making the machines? And speaking at the regulatory process, is there some sort of registration which we have to go through in Japan and can you give us an update on the FDA involvement in North America?

You know all of - all of the US manufacturing capacity is being absorbed in US, with us managing to peel off a few units to send in to our foreign markets including our walk-in centers. So no, we are not currently manufacturing for Japan today, but by June 1 we will be in the manufacturing business in China and start warehousing some inventories for a Japan launch in Q4.

On the regulatory front, there is not a registration requirement in Japan. We are positioning this device and we will be using it clearly for non-medical purposes. We're talking to the regulators there to make sure that we are clear in how we are positioning the scanner to avoid medical device registration requirements and we are you know pretty confident today that we are going to be able to be do that as much as we have in the US.

In the US, there is no regulatory update. The FDA continues to be quiet on the issue and so we continue to put you know 150 units a month into the US market.

OK. Thank you.

[OPERATOR INSTRUCTIONS] There is a follow-up question from Kathleen Reed of Stanford Financial.

Thanks. Can you just comment a little bit on Taiwan? Sales were down I believe year-over-year in the quarter, just what is going on with the market?

Yeah, thanks for asking that question, probably should have addressed that earlier, but it is perhaps a little bit curious to some that Hong Kong would be enjoying the growth that it is when Taiwan is down a little bit year-over-year. The reasons for that we feel is actually fairly - it is a tactical issue. China as you know has an open border with Hong Kong and so there is a lot of flow of people and goods between Hong Kong and Mainland China.

That is not the case with Taiwan. In fact I believe that there is still no direct flight between Taipei and Mainland China, you have to go through Hong Kong. So a lot of our Chinese developing sales leaders are spending time in Hong Kong with our sales leaders there and Hong Kong is benefiting from that as a result. In Taiwan, all we are really seeing is the outbound flow of Taiwan leaders into Mainland China with no residual benefit washing back into the Taiwan market. So you know the fact that Hong Kong is up as much as it is very encouraging, the fact that Taiwan will be down a little bit, is not particularly surprising.

But do you have any plans in place to kind of increase sales within the Taiwan - within the country itself without any residual benefit to China?

Yeah, we of course we would like to grow sales in Taiwan as we would in all of our countries and we do have plans in place and initiatives coming up. Product launches, the scanner again to play a meaningful role in Taiwan which it hasn't done yet. And so, yeah we are executing the business there as best we can to keep the sales up.

Kathleen, I anticipate that by third quarter, sales will be even or slight ahead. I think we are down about 13% in the fourth quarter year-over-year and here in the first quarter we are down 7%. We actually see the trend positive. We talked to Cory (ph), our regional manager over there, Regional President of that region. He's still very positive about what he sees in Taiwan, particularly the attitude of the leaders there and the success they are having you know in the region so. Yeah, we actually feel quite positive about where Taiwan is out today and believe that by probably the third quarter we will see slight year-over-year increases.

Great and so we should just see sequential improvement in the second quarter. So maybe still down but not down as much as the seven.

That is correct.

OK and just also on Latin America, your new market that you opened in September, I think you said in your remarks that it was up 19%, is that sequentially or on a year-over-year basis?

You know that was year-over-year and that is for - and that is for Mexico, Brazil, Guatemala combined.

OK. Is that - is it up sequentially or can you give us the dollar amount of those markets - you know the whole market in the region Latin America?

Yeah the market in the reason was about 650,000 dollars for the quarter, so still very small. If you break that down, Brazil which is really where we are executing our experiments there and find the emerging market model would be actually up 39% in local currency and Mexico was down slightly and Guatemala was up.

Yeah all those local currencies?

That is correct. You know all in all -

Year-over-year.

Year-over-year.

Year-over-year numbers, all in all the business was up 19% in Latin America.

OK so is the region - is it up from the fourth quarter as well?

No. no it is down and typically we always see you know a decline from the fourth quarter to the first quarter.

OK.

So we would - just a set back.

The first quarter is the hottest summer in Brazil.

OK.

And things turn down but we are still encouraged with the year-over-year improvement and actually particularly because we haven't yet really fully implemented our new plan. You know we still have yet to introduce Nu Skin Living Line (ph), we still have yet to introduce the Pharmanex products that we are putting into that market, all of which will happen in Brazil in the second quarter.

OK great. And just real quickly, the last question is just you made a statement that you're changing the way you include your active distributors to include, the preferred customer is from China but now as I understand you are going to include your customers from your other markets, so is that just - if someone logs onto your internet site and buy something without having a distributor, you are going to include that sale as a preferred customer, is that how you look at that?

Yeah really the way we look at the preferred customers is those who come on under a subscription plan with the business or you know signed up as a distributor but are buying directly from the company. With the scanner particularly in the US and this is really the primary market that is affected by this change today but with the scanner rolling out we believe this would be a important part of our business going forward.

We have a lot of customers who don't elect to sign up a distributor write-off, but they sign up for a subscription order product and stay with us for you know for a extended periods of time and particularly in the US, for example in the first quarter we added over 10,000 preferred customers to our business. It is just beginning to be a more and more impactful piece of our revenue and we think that it is just a better disclosure to actually include them in that active number, so that you can get a better feel for how the overall business is growing in terms of active people buying directly from the company each quarter.

So it basically ties to the ADP orders?

Yeah you recall Kathy that in the past we included in our active distributor accounts any distributor who purchased any level of product during the prior quarter.

Right.

So you know we may have had a distributor who ordered $10 worth of product in the quarter, we were accounting that as an active and so just isn't quite right to have a subscriber who you know is giving us $50, $60, $70 a month or more in product purchases and not include them in our numbers.

So would this change at all, with later on in the year when China changes direct selling rules? I mean so is this all going to change again the way you classify the people?

You know I don't think so, I think we will just continue with it on this basis. I think that we will continue to have a preferred customer status in China even if the regs change.

OK.

And in fact most of our markets are developing preferred customer programs similar to what we are seeing the US. So it is going to become a more important global number than a less important number.

OK. Great. Thank you every much.

OK. Thank you. And operator we actually have to run to a meeting here. Well, if you don't mind we will sign off and thank you all for joining us on the call today. Again, we are at the Sidoti conference today, or also in New York city tomorrow, I think our schedule is pretty booked but you might give Scott Pawn or Charlie Allen a call, if you like to visit with us over here. Thanks very much.

Thank you for participating in today's conference, you may disconnect at this time.